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How Indonesia’s New SWF Aims to Raise Infra Funds

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14 October,2020

Published in: AsianInvestor

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COMMENTARY

Indonesia seeks to raise infrastructure funds via a new sovereign wealth fund (SWF) set up by the Ministry of Finance called Lembaga Pengelola Investasi (LPI). Besides mobilising foreign direct investments (FDIs), the SWF can be used to recycle state-owned enterprise (SOE) assets. The SWF can also step in and co-fund projects alongside SOEs.

 

With its initial capital at IDR175 trillion ($5 billion), the SWF will also invite participation from foreign investors. Japan's Softbank, United States' International Development Finance Corporation (IDFC) and the UAE are the first few who have shown their interest. 

The founder and managing director of Global SWF, Diego Lopez, adds that partnership with other corporates and institutions will be a key element of the LPI including transparency, risk management, disclosure and accountability.

Indonesia plans to raise infra funds with their new sovereign wealth fund (SWF) via investors as well as different investment paths. The SWF, named Lembaga Pengelola Investasi (LPI), is set to begin after passing the Omnibus Law less than 10 days ago.

The LPI will begin with IDR75 trillion ($5 billion) in capital. This consists of $2 billion pumped in by the government in cash, while the remaining $3 billion are assets transferred from other state organisations.

The Indonesian government plans to seek for foreign investments partners to meet the timings of this development. Since Indonesia needs huge infrastructure requirements, the government is pressured to raise funds and investments from those partners.

Fortunately, there has been interests from foreign investors. In January, the United Arab Emirates (UAE) wants to invest particularly in the infrastructure and energy sector. Other investors includes Japan's Softbank as well as the United State' IDFC. Potential partners consist of the Asian Infrastructure Investment Bank (AIIB) and the Asian Development Bank.

The LPI is aimed to accomplish three goals:

1.To accelerate new infrastructure projects

2.To create a recycling process of state-owned enterprise (SOE) assets​,

3.To ease pressure of SOEs​

However, Gary Smith, managing director of Sovereign Focus, feels that the SWF is quite misleading because the Indonesian government acts like a general partner in a private equity fund whereby a country needs to accelerate their infrastructure investment to meet their large infrastructure investment requirements.

Diego Lopez, founder and managing director of Global SWF, then attested that this method is increasingly employed. Foreign investments are used as a channel to obtain financial returns as well as a way to grow investments and enhance the domestic economy.

Nevertheless, the Indonesian government should be watchful of their potential partners and ensure that there will not be any conflict of interest when managing the fund. Ultimately, the Indonesian government should hold an appropriate system of governance and establish laws that clearly specify the rules.

The country has abundant projects with captivating returns. Due to their lack of funding options and strapped fiscal position, Indonesia might be taking the right initiatives to develop their economy with this SWF. However, they should ensure that their workstreams and policies are fixed in place for the project to run smoothly.

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